The House of Morgan

by Ron Chernow

  The friction between Jack and Schiff led to a tense exchange in May 1915, when a German submarine off the Irish coast sank the Cunard’s Lusitania, one of two lavish ships built in response to Pierpont’s shipping trust. Over a thousand people died, including 63 children. Alfred Gwynne Vanderbilt was among the 128 American casualties. There was grief across America. That morning, amid heavy gloom, Schiff suppressed his pride and offered his regrets at the Corner. Haughty and formal, he never made this sort of call. When he entered, he found Jack in the partners’ room. Instead of receiving Schiff with courtesy, Jack muttered some angry words and stormed off, leaving Schiff in mystified silence. He shuffled out alone.

  The other partners gasped. It was a flagrant breach of the Gentleman Banker’s Code, the need to maintain civility on the surface. Jack remarked rather sheepishly, “I suppose I went a little far? I suppose I ought to apologize?” Nobody dared to speak. Then the quick-witted Dwight Morrow scratched a biblical quote on a piece of paper and handed it to Jack. It said, “Not for thy sake, but for thy name’s sake, O House of Israel!”33 Taking the hint, Jack took his hat and went off to Kuhn, Loeb to apologize. The tale vividly captures Jack’s contradictory nature—the polite and courtly surface, the mass of churning emotions within—as well as the strains of a highly artificial world that demanded constant civility. With the big syndicated loans, one couldn’t antagonize a powerful bank that might be an ally on the next issue.

  This muted warfare flared into the open in September 1915, during the creation of the biggest foreign loan in Wall Street history—the $500-million Anglo-French loan. It was five times as big as the previous record holder, the $100-million loan to Great Britain for the Boer War. The Stettinius mill was chewing up £2 million a day and threatened to exhaust British financial resources. As early as April 1, 1915, Jack lunched with Lloyd George and discussed a loan of at least $ 100 million to prop up the pound. Teddy Grenfell and other directors of the Bank of England were worried about the makeshift war financing.

  The financing problem grew acute that July. The British canceled one contract for the Russians in New York for lack of foreign exchange. To meet a dollar deadline at Morgans, Reginald McKenna had to commandeer American securities owned by Prudential Assurance—a piece of ad hoc midnight desperation that deeply disturbed Prime Minister Asquith. It was a rickety way to run a war. For the House of Morgan, stymied by the State Department ban on loans, it was an excruciating time. The one riddle Morgans could never resolve was what to do when U.S. and British policy diverged.

  Wilson opposed a jumbo Allied loan but was finally persuaded by his cabinet that, without it, U.S. exports would suffer. Treasury Secretary McAdoo argued in late August that U.S. prosperity depended on trade with the Allies. Robert Lansing, who had replaced Bryan as secretary of state, starkly warned that without a loan, “the result would be restriction of outputs, industrial depression, idle capital and idle labor, numerous failures, financial demoralization, and general unrest and suffering among the laboring classes.”34 Wilson was convinced.

  In September, the British cabinet dispatched an Anglo-French mission to New York to arrange a huge private loan. The North Atlantic swarmed with submarines, and Grenfell was told not to inform Morgans of the group’s membership. The commission was headed by Lord Reading, the lord chief justice, and included Sir Edward Holden, chairman of the Midland Bank, Basil Blackett of the British Treasury, and M. Octave Hombert, the French representative. Harry Davison and Jack went down to the pier to greet the Lapland and saw the group settled in at the Biltmore Hotel.

  Once again, the Anglo-American Morgan love affair was full of spats and recriminations. Unwavering in support of Britain, Morgan partners felt bruised and demeaned by having to compete for the loan. Nevertheless, they gave the visiting group a red-carpet reception. Lord Reading, ne Rufus Isaacs, presented a formidable challenge to Jack Morgan’s prejudices. Son of a London fruit merchant, he was British, brilliant, titled—and Jewish. He had risen to the position of attorney general, cross-examining witnesses during the British Titanic inquiry. Jack and Davison visited Reading at the Biltmore, feted him at the Morgan Library, and entertained him aboard the Corsair. Against all odds, personal chemistry between Jack and Reading would help to seal the deal.

  The Anglo-French loan tested New York’s capacity as a financial market. The victorious Morgans had to contend with broad hostility toward Britain. One in ten Americans was of German ancestry, and many first-generation Irish immigrants opposed the loan. Fantastic numbers were bandied about—up to $1 billion—and skeptics doubted it could be done. Such sums staggered and frightened Americans, much as had the huge trusts a few years before. In retrospect, the Anglo-French loan would mark the rise of America as the world’s chief creditor nation. Yet, even as the House of Morgan superintended this transfer of financial power, Jack was dubious that it would last, assuring Grenfell that “when the war is over, you will find the United States settling down again into using the European money markets as a clearing house, very much as before.”35 Jack didn’t exult over Britain’s decline and found it hard to foresee the demotion of his beloved London.

  After an honorary dinner at the Morgan Library, Jack invited Reading up to his second-floor study for cigars. He and his partners had to dampen inflated British expectations. Through the haze of cigar smoke, Jack casually knocked several hundred million dollars off the loan. “Reading,” Jack said, “I wouldn’t ask a billion if I were you. I think you’d be wiser to limit your first large bond issue to half a billion.”36 To Jack’s surprise, Reading consented to a $500-million (£100-million) issue. After syndicate charges were factored in, the interest rate was a steep 6 percent. Jack said the House of Morgan would waive any extra compensation as syndicate manager.

  Fascinated by Lord Reading, Jack was preoccupied with his religion:

  Lord Reading impressed me enormously. His mind is so clear, and he sees the bearing of each point so quickly that it was a great pleasure to discuss things with him. His only drawback was that he was, and of necessity must be, so much in with the Jews that he takes their point of view to a certain extent. This of course is natural, but seeing that most of the Jews in this country are thoroughly pro-German, and a very large number of them are anti-J. P. Morgan & Co., it would have been desirable if he had not had quite so close affiliations with them.37

  It was a curious letter. Lord Reading’s position as head of the loan mission should have dispelled any doubts as to his loyalty and dashed notions of a monolithic Jewish viewpoint; instead, Jack implausibly perceived some common denominator between Reading and German Jews. In fact, when Reading met Jacob Schiff, the latter laid down a suicidal precondition for Kuhn, Loeb participation in the loan—that not one penny could go to England’s ally, Russia. Reading bluntly replied that “no government could accept conditions which discriminated against one of its allies in war.”38 In one stroke, Kuhn, Loeb became persona non grata in London finance, further clearing the way for the Morgan triumphal march.

  Still more damaging was the controversy at Goldman, Sachs, where partners exercised vetoes in important matters. Loyal to Germany, Henry Goldman refused to share in the Morgan-sponsored issue, provoking a crisis at the firm and causing its voluntary exile from wartime finance on Wall Street. According to Stephen Birmingham, when the “Kleinwort bank in London cabled to New York to say that Goldman, Sachs was in danger of being blacklisted in England,” Henry Goldman was forced to resign from the family firm.39 Feelings ran so high that Goldman and Philip Lehman, dubbed Wall Street’s “hottest underwriting team,” stopped speaking to each other. For a generation, Jewish banks on Wall Street were handicapped by their affiliation with Germany.

  The $500-million Anglo-French loan was far larger than any bond issue orchestrated by Pierpont. Sixty-one underwriters and 1,570 financial institutions marketed the bonds. (The House of Morgan resented not being appointed sole agent responsible for paying the bond’s interest.) It was an extremely tough selling
job, especially in isolationist sections of the Midwest. To sweeten the deal, participating banks were allowed to keep some of the money that they raised on deposit for a while. It was also widely advertised that the money would be spent only in America. Despite these inducements, only one major bank in Chicago—where pro-German depositors threatened a boycott—joined the syndicate, and there were none from Milwaukee. The Morgan partners signed up many famous individuals, including Andrew Carnegie and even Samuel Untermyer of Pujo fame, as well as suppliers of war materiel such as the Guggenheim brothers and Charles Schwab of Bethlehem Steel, who felt obliged to safeguard their thriving war business. But they couldn’t offset the poor midwestern performance, and the syndicate was stuck with $187 million in unsold bonds by year’s end.

  To raise additional dollars, the British levied a tax on any dividends received from American shares, and British citizens rushed to give their shares to the government. So many securities were tendered that the Bank of England Court Room was heaped high with certificates. Morgans liquidated $3 billion of these securities, delicately feeding them into the New York market so as to prevent a collapse in share prices.

  The Anglo-French loan was soon exhausted. Before the war ended, the House of Morgan had arranged over $1.5 billion in Allied credits. The British would lavish many encomia on the Morgan role before U.S. entry into the war. In Morgan Grenfell’s Tea Room hangs a Lloyd George letter of 1917 that says, in part, “We were fortunate enough to secure the assistance of a firm which have throughout done everything in its power to protect the interests of the British Government.”40 Visiting the Corner years later, Lord Northcliffe, the British press baron, exclaimed, “The war was won within these walls.”41 Lord Moulton, head of the British Munitions Board, said that Du Pont, Bethlehem Steel, and J. P. Morgan and Company had rescued the French and British armies in 1915.

  Yet, as was always true of Morgan relations with Britain, the public embrace concealed a fair degree of tension. The British often felt the bank bungled its political role, however well it handled the financial side. Arthur WilLer, the London Times correspondent in Washington, described the House of Morgan in 1916: “The most unpopular house in the country, the personification for the radical West of the malign money power of Wall Street, it has done nothing to propitiate either the people or the politicians.”42 That year, Jack campaigned for the Republican presidential candidate, Charles Evans Hughes—which the British thought unwise. Jack and Harry Davison also treated the new Federal Reserve Board in a somewhat high-handed manner. Davison, in particular, seemed to offend the British. He had a brash, decisive manner that inspired subordinates but could be clumsy and arrogant. The Foreign Office called him “injudicious,” while Ambassador Spring-Rice said Davison had “all the aggressiveness of the older Morgan without his genius.”43

  Davison either mishandled his relationship with Willard Straight or decided that the romantic, impetuous Straight would just never fit in at Morgans. Straight expected to help negotiate with the Anglo-French loan. “I thought I might have been of service in connection with these negotiations, but I was asked to perform no work, and this rankled,” he said.44 He was given little responsibility, and the august House of Morgan didn’t share his interest in poor countries. That September, at age thirty-four, he resigned from the bank. He had never translated his precocious China success into a mundane Wall Street setting and was offended that he hadn’t become a Morgan partner. He preferred polo, golf, and his outside literary interests to the consuming dedication that was de rigueur at 23 Wall. Shortly after wartime service, in 1918, he died of influenza and pneumonia. His widow, Dorothy, would help to found the New School for Social Research in New York and Dartington Hall, an experimental school in South Devon, England.

  By 1917, British credit was practically exhausted. Their salvation was German resumption of unrestricted submarine warfare against American shipping. When the United States entered the war, on April 6, 1917, Washington immediately granted the Allies $1 billion in credit, lifting the onus from J. P. Morgan and Company. After the United States entered the war, the House of Morgan expected to be repaid a $400-million loan to Britain from the proceeds of the first Liberty Loan drive. But Treasury Secretary McAdoo feared Congress would be upset if government money went to that old Democratic bogeyman—the Money Trust. To the amazement of Morgan partners, the British government didn’t seem bothered by the double cross. In his journal, Teddy Grenfell noted wounded feelings among the Morgan partners: “Although JPM &. Co. had placed all their resources monetary and otherwise at the disposal of the British Government, the ministers especially finance showed little appreciation. . . . The Morgan houses felt very bitterly not only that no appreciation was shown of their services but also that as soon as the Government had got all their monies which Morgan & Co. could lend or borrow from friends for England, that the British Treasury intentionally kept all information from them.”45

  During the summer of 1917, Lord Cunliffe, the abrasive, despotic governor of the Bank of England, argued the Morgan case against the less sympathetic chancellor of the Exchequer, Bonar Law. It formed part of a larger struggle between the bank and the Treasury for control of British financial policy. The row became so vitriolic that Prime Minister Lloyd George threatened to nationalize the Bank of England. On July 4, Grenfell was summoned to a Cabinet meeting at 10 Downing Street, and Lloyd George angrily asked him why the House of Morgan was making such a fuss. (Grenfell referred to Lloyd George as “our little Welsh goat.”46) In the end, the British Treasury, incensed at Cunliffe’s behavior, spiked his reelection as governor in 1918. This paved the way not for a Morgan foe but for Montagu Norman, who took over the bank in 1920 and proved the most influential British ally in Morgan history.

  When the United States declared war, Jack was jubilant. With naive, patriotic generosity, he told President Wilson he could transfer the Export Department intact to Washington. He was ready to give Stet-tinius a leave of absence, cover staff salaries for a time, and forgo commissions. It didn’t dawn on him that this was politically impossible. Isolationists continued to accuse the House of Morgan of whipping up pro-war sentiment. And traveling across America, Treasury Secretary McAdoo noted intense ill will toward the house for having profited from the munitions purchases.

  To head the powerful new War Industries Board, Wilson chose Daniel Willard of the Baltimore and Ohio Railroad and then Democratic party stalwart, Bernard Baruch; to appease Morgans, he made Stettinius surveyor general of supplies for the U.S. Army. Only half-comically, Baruch confessed relief that Pierpont had spurned his offer of help during the 1907 panic, for had it been accepted, it might have jeopardized his political prospects under Wilson. There was now a political stigma attached to Morgan partners. White House aides noted that President Wilson frowned when he saw Dwight Morrow’s name on a list of prospective appointees. Although he did appoint him, to the Allied Maritime Council, he said firmly, “We mustn’t have any more of those men.”47 Morrow would, in fact, become an important civilian adviser to General Pershing at Chaumont. Harry Davison, upon being named head of the Red Cross War Council, expected to assume full powers. When he then clashed with Red Cross organizer Mabel Boardman, former president William Howard Taft went to the White House to mediate. Though siding with Davison, Wilson told Taft that “New York bankers liked unrestricted powers, that they had been used to it in their business . . . but that in such a matter it was not wise.”48

  From the standpoint of later Wall Street history, the government’s wartime Liberty Loan drives have an important place. The United States sold nearly $17 billion in Liberty Bonds. The spirited promotional campaign brought Charlie Chaplin and Douglas Fairbanks, Sr., to rallies at the Corner. Treasury Secretary McAdoo wanted to reach small farmers, businessmen, and workers and thus created a new generation of American investors. One bureaucratic genius of the campaign was a Wall Street lawyer, Russell C. Leffingwell, who had been a neighbor of McAdoo in Yonkers, New York. McAdoo made him coun
sel and then assistant treasury secretary in charge of the Liberty Bond drives. He would later be a famous Morgan partner and a critical link with the Democratic party.

  The House of Morgan emerged from the war with greatly enlarged power. For Jack Morgan, so widely discounted when he took over in 1913, there was a sense of psychic relief, a knowledge that he had measured up to his father. He told Paris partner Herman Harjes, “I am glad to say that our firm stands, as it always has stood, in the middle of things. . . . I feel that I am able in a measure to take Father’s place in the community and help out in many ways.”49 As a young man in London, it had amused him when Lloyd’s took out a $2-million insurance policy on Pierpont’s life. Now he shattered all records by taking out a $2.5-million policy on his own.

  But Jack’s hypersensitive nature was such that he seemed more disturbed by criticism than gratified by success. After Wilson rejected this offer of the Export Department, he sulked and licked his wounds. He was a man of fundamentally incompatible desires, who wished to be fabulously rich and loved; useful and appreciated; not only famous but understood fairly by the masses. He had a way of magnifying enemies. Even as he emerged as the world’s best-known banker, he still felt embattled. As he wrote in 1917: